5 ms·

Normally you run storage facilities neither all the way full nor all the way empty: you want to be able to smooth out fluctuations in supply and demand. Becaus

by jefftk 4y ago

Normally you run storage facilities neither all the way full nor all the way empty: you want to be able to smooth out fluctuations in supply and demand. Because of the war Europe is running gas storage near its upper limit, which means we should expect less flexibility and more price volatility: they won't want to draw them way down if we get a serious cold snap, and they have nowhere to put extra gas if it's warmer than usual. The latter happened, there's nowhere to put incoming gas, so spot prices fell below zero.

visviva 4y ago
Great, succinct explanation - thanks.
sorokod 4y ago
>you want to be able to smooth out fluctuations in supply and demand. Can you say a bit more about the "you" mentioned? I can imagine "you"s who care only about having heating during wintertime.
- antasvara 4y ago
  From context, it seems that the "you" in question is "a company that runs a natural gas storage space." As a company with fiduciary responsibilities, they likely can't concern themselves too much with the problem you mention.
  - proser 4y ago
    European utilities are often public utilities that are nationalized in some way, not strictly corporate businesses.
    - jhoechtl 4y ago
      For good. Remember Texas electricity costs soaring?
    - AlmostAnyone 4y ago
      Not sure what you're talking about, practically every major EU energy org is a corporation (traded on an exchange or even an Ltd-like private company), only sometimes there's a bit of it owned by a state... Can you give some examples of major energy organizations that are wholly-owned by a state (or at least majority-owned) or actual organizational units of a state?
      - Gwypaas 4y ago
        Vattenfall. https://en.wikipedia.org/wiki/Vattenfall https://en.wikipedia.org/wiki/Vattenfall Fortum, 50.x% owned by the finish state. https://en.wikipedia.org/wiki/Fortum https://en.wikipedia.org/wiki/Fortum Equinor, 67% Norwegian government. https://en.wikipedia.org/wiki/Equinor https://en.wikipedia.org/wiki/Equinor Ørsted, 50.x%. Danish state. https://en.wikipedia.org/wiki/%C3%98rsted_(company) https://en.wikipedia.org/wiki/%C3%98rsted_(company) EDF, 87% French state. https://en.wikipedia.org/wiki/%C3%89lectricit%C3%A9_de_France https://en.wikipedia.org/wiki/%C3%89lectricit%C3%A9_de_Franc...
        AlmostAnyone 4y ago
        Good examples. But what about the rest of the continent? And while these companies are the largest on their home markets, they're not the only ones there, are they? And they operate on foreign markets where they are a corporation like any other. For this we should consider only the home-based operation where they can have influence on the state policy, IMHO. And what about EU rules against unfair competition? They basically force these companies to behave like any other market participant and forbid the state from giving them much/any help. This had real consequences in Poland and Czechia where the states wanted to help nuclear projects (in case of Czechia it was CEZ - the partially state-owned energy company) but the EU stopped it.
- jefftk 4y ago
  The standard "smooth out the fluctuations" approach gives an extremely low probability of running out of fuel during the winter at a reasonable cost, but only assuming sufficient fuel imports. Because of the loss of Russian gas and not having sufficient LNG infrastructure to make up it, Europe will burn gas faster than replacement when it's sufficiently cold, and if the cold weather lasts long enough they could run out of gas. So they're now using a more expensive and wasteful strategy of keeping storage closer to full, exactly to reduce the risk of people not having heating during winter.
  - sorokod 4y ago
    Given the disrupted gas supply, what alternatives are there to the "expensive and wasteful strategy" ?
    - jefftk 4y ago
      I do think expensive and wasteful is the right choice here.
    - avianlyric 4y ago
      Just because you’ve got no other option’s doesn’t mean a strategy isn’t “expensive and wasteful”. It just means you’re desperate, so you’ll happily eat the cost. But long term I would expect Europe to use a much less expensive and wasteful strategy. But obviously it takes time to build and deploy alternatives.
    - kqr 4y ago
      The strategy in question is, more generally, moving volatility in the shoulders of the distribution to the central region. It knowingly subjects us to worse-than-normal price movements in the stable regime so that price movements aren't as crazy when we go out to more extreme regimes. The alternative would be to, well, not do that. Or any other of a number of volatility-controlling strategies. I don't think any of them are better, but there's always an alternative.
- Dylan16807 4y ago
  One of the important factors in ensuring heating is keeping the movement of gas from being too unpredictable. One of the important factors in keeping it affordable is having a stable supply.
  - sorokod 4y ago
    Stable supply is not what we are looking at here.
    - Dylan16807 4y ago
      Storage is a factor in supply. The storage is having trouble, so this costs more money, which means it's going to be harder to afford heating even if the gas doesn't run out. That's why smoothing out fluctuations is relevant to people that "only care about having heating".
      - sorokod 4y ago
        What do you mean by "storage is having trouble"? Are you thinking of an alternative?
        Dylan16807 4y ago
        The price going wonky is the trouble at hand. I am not thinking of an alternative unless "having more storage" counts.
        lsaferite 4y ago
        They mean they don't have the capacity to offload all the waiting tankers due to the on-shore storage tanks being mostly full. The ships sitting idle costs money. In an effort to stop the bleeding from the idle tankers, they drive the costs of the fuel down in an attempt to lower the supply in the on-shore tanks so they can offload the waiting tankers. In a normal scenario they would have enough slack in the on-shore storage to absorb the ebbs and flows of incoming tankers and outgoing usage without resorting to idle tankers in the ocean.
- danielmarkbruce 4y ago
  This is a good question, I don't understand the downvotes or the responses (1 exception). Gas is delivered to customers via a whole system of players, each who have different motivations and incentives. How you arrive at the current state of "more gas in storage than otherwise" is, at least on the surface, an interesting question when one considers that complexity.
speedylight 4y ago
Are you saying that by holding onto so much gas that there’s less in active circulation therefore it leads price increases?
- deleted 4y ago
  [deleted]
- jacobolus 4y ago
  He is saying having less available slack increases volatility: It led to a recent price drop because when gas usage was lower than expected there was nowhere to store the excess supply as would usually be done. It will lead to a price rise if usage is higher than expected because they won’t want to risk depleting stores too much.
  - deleted 4y ago
    [deleted]
  - fian 4y ago
    To expand on this a bit, oil and particularly liquefied natural gas (LNG) production facilities are hard to stop and restart. Many systems need to be at a particular temperature, hydrates can form in gas pipelines during long shutdowns and thus need chemical back injection to manage, hot/cold cycling of equipment cause thermal degradation and many other challenges. So a lot of design work for oil and gas production facilities is around minimising shutdowns. A large part of this is working out storage capacities, and for LNG, the shipping rates. If the LNG carriers (tankers) are unable to offload at a receiving terminal there is a higher chance the LNG loading terminal will reach tank tops. Tank tops at the loading terminal means the upstream production facility will need to turn down or stop all production. Given the high costs (capital and production opportunity) that incurs for the production facility, it might be better to take a short term loss for a few cargoes to prevent the tank tops at the loading terminal and thus a production shutdown.
i_am_proteus 4y ago
Yes, and: natural gas is a byproduct of oil production. For decades, natural gas was flared off as an unwanted byproduct. It is still flared off today when it's uneconomical to capture it. Unlike other goods where supply will drop if there is insufficient demand, a lot of natural gas gets produced regardless due to oil production. It gets sent to market because there is no local storage capacity and the alternative would be to flare it off. Shenanigans in the futures market aside, this contributes to (temporary) oversupply driving prices negative. The same warehousing phenomena result in this negative price probably not lasting very long. Barring an extremely warm next few weeks, expect the price to be back up soon.
ShivShankaran 4y ago
another big reason is the difference in pricing between pipe and shipping. With pipe it's instant while with ship the spot pricing is before the ship start it's journey from the filling port. Added to the complexity that in EU all the ships with natural gas are stuck at ports because unloading capacity has not been upgraded. Combining both has reduced the spot prices so that more gas is not sent. It does not reflect the real demand which we are going to have in few months or the volatility. if you like volatility, natural gas is the best product. One contract is around $60k and could net you thousands in minutes if you play it right.
freefaler 4y ago
Some important caveats - the storage squeeze is only in Spain - storage facilities are pre-booked, meaning the if you want to buy some gas you should've booked the some storage beforehand. Storage supply is a non-elastic on the shore.
- kgwgk 4y ago
  Dutch gas spot prices for delivery within an hour going negative may be telling us something about the spare storage capacity connected to that network though.
Stranger43 4y ago
The problem is as for most of the current "Supply Chain Crisis" that the core of the problem is with logistics and distribution not raw supply, i.e. it doesn't really matter how many Liqid Gas carriers that show up of the coast of Europe as there is nowhere to unload it as the networks are designed around just in time supplies of gas flowing out of the pipelines from Russia. This distribution problem is what is sending the price of everything sky rocketing and for anything other then microchips from the overstretched TSMC fabs the real cause of the price hikes is a breakdown in the fragile "just in time" logistics network, dependent on a few choke point running at 101% efficiency all of the time.

by jefftk 4y ago

visviva 4y ago

Great, succinct explanation - thanks.

sorokod 4y ago

>you want to be able to smooth out fluctuations in supply and demand. Can you say a bit more about the "you" mentioned? I can imagine "you"s who care only about having heating during wintertime.

antasvara 4y ago
From context, it seems that the "you" in question is "a company that runs a natural gas storage space." As a company with fiduciary responsibilities, they likely can't concern themselves too much with the problem you mention.
- proser 4y ago
  European utilities are often public utilities that are nationalized in some way, not strictly corporate businesses.
  - jhoechtl 4y ago
    For good. Remember Texas electricity costs soaring?
  - AlmostAnyone 4y ago
    Not sure what you're talking about, practically every major EU energy org is a corporation (traded on an exchange or even an Ltd-like private company), only sometimes there's a bit of it owned by a state... Can you give some examples of major energy organizations that are wholly-owned by a state (or at least majority-owned) or actual organizational units of a state?
    - Gwypaas 4y ago
      Vattenfall. https://en.wikipedia.org/wiki/Vattenfall https://en.wikipedia.org/wiki/Vattenfall Fortum, 50.x% owned by the finish state. https://en.wikipedia.org/wiki/Fortum https://en.wikipedia.org/wiki/Fortum Equinor, 67% Norwegian government. https://en.wikipedia.org/wiki/Equinor https://en.wikipedia.org/wiki/Equinor Ørsted, 50.x%. Danish state. https://en.wikipedia.org/wiki/%C3%98rsted_(company) https://en.wikipedia.org/wiki/%C3%98rsted_(company) EDF, 87% French state. https://en.wikipedia.org/wiki/%C3%89lectricit%C3%A9_de_France https://en.wikipedia.org/wiki/%C3%89lectricit%C3%A9_de_Franc...
      - AlmostAnyone 4y ago
        Good examples. But what about the rest of the continent? And while these companies are the largest on their home markets, they're not the only ones there, are they? And they operate on foreign markets where they are a corporation like any other. For this we should consider only the home-based operation where they can have influence on the state policy, IMHO. And what about EU rules against unfair competition? They basically force these companies to behave like any other market participant and forbid the state from giving them much/any help. This had real consequences in Poland and Czechia where the states wanted to help nuclear projects (in case of Czechia it was CEZ - the partially state-owned energy company) but the EU stopped it.
jefftk 4y ago
The standard "smooth out the fluctuations" approach gives an extremely low probability of running out of fuel during the winter at a reasonable cost, but only assuming sufficient fuel imports. Because of the loss of Russian gas and not having sufficient LNG infrastructure to make up it, Europe will burn gas faster than replacement when it's sufficiently cold, and if the cold weather lasts long enough they could run out of gas. So they're now using a more expensive and wasteful strategy of keeping storage closer to full, exactly to reduce the risk of people not having heating during winter.
- sorokod 4y ago
  Given the disrupted gas supply, what alternatives are there to the "expensive and wasteful strategy" ?
  - jefftk 4y ago
    I do think expensive and wasteful is the right choice here.
  - avianlyric 4y ago
    Just because you’ve got no other option’s doesn’t mean a strategy isn’t “expensive and wasteful”. It just means you’re desperate, so you’ll happily eat the cost. But long term I would expect Europe to use a much less expensive and wasteful strategy. But obviously it takes time to build and deploy alternatives.
  - kqr 4y ago
    The strategy in question is, more generally, moving volatility in the shoulders of the distribution to the central region. It knowingly subjects us to worse-than-normal price movements in the stable regime so that price movements aren't as crazy when we go out to more extreme regimes. The alternative would be to, well, not do that. Or any other of a number of volatility-controlling strategies. I don't think any of them are better, but there's always an alternative.
Dylan16807 4y ago
One of the important factors in ensuring heating is keeping the movement of gas from being too unpredictable. One of the important factors in keeping it affordable is having a stable supply.
- sorokod 4y ago
  Stable supply is not what we are looking at here.
  - Dylan16807 4y ago
    Storage is a factor in supply. The storage is having trouble, so this costs more money, which means it's going to be harder to afford heating even if the gas doesn't run out. That's why smoothing out fluctuations is relevant to people that "only care about having heating".
    - sorokod 4y ago
      What do you mean by "storage is having trouble"? Are you thinking of an alternative?
      - Dylan16807 4y ago
        The price going wonky is the trouble at hand. I am not thinking of an alternative unless "having more storage" counts.
      - lsaferite 4y ago
        They mean they don't have the capacity to offload all the waiting tankers due to the on-shore storage tanks being mostly full. The ships sitting idle costs money. In an effort to stop the bleeding from the idle tankers, they drive the costs of the fuel down in an attempt to lower the supply in the on-shore tanks so they can offload the waiting tankers. In a normal scenario they would have enough slack in the on-shore storage to absorb the ebbs and flows of incoming tankers and outgoing usage without resorting to idle tankers in the ocean.
danielmarkbruce 4y ago
This is a good question, I don't understand the downvotes or the responses (1 exception). Gas is delivered to customers via a whole system of players, each who have different motivations and incentives. How you arrive at the current state of "more gas in storage than otherwise" is, at least on the surface, an interesting question when one considers that complexity.

speedylight 4y ago

Are you saying that by holding onto so much gas that there’s less in active circulation therefore it leads price increases?

deleted 4y ago
[deleted]
jacobolus 4y ago
He is saying having less available slack increases volatility: It led to a recent price drop because when gas usage was lower than expected there was nowhere to store the excess supply as would usually be done. It will lead to a price rise if usage is higher than expected because they won’t want to risk depleting stores too much.
- deleted 4y ago
  [deleted]
- fian 4y ago
  To expand on this a bit, oil and particularly liquefied natural gas (LNG) production facilities are hard to stop and restart. Many systems need to be at a particular temperature, hydrates can form in gas pipelines during long shutdowns and thus need chemical back injection to manage, hot/cold cycling of equipment cause thermal degradation and many other challenges. So a lot of design work for oil and gas production facilities is around minimising shutdowns. A large part of this is working out storage capacities, and for LNG, the shipping rates. If the LNG carriers (tankers) are unable to offload at a receiving terminal there is a higher chance the LNG loading terminal will reach tank tops. Tank tops at the loading terminal means the upstream production facility will need to turn down or stop all production. Given the high costs (capital and production opportunity) that incurs for the production facility, it might be better to take a short term loss for a few cargoes to prevent the tank tops at the loading terminal and thus a production shutdown.

i_am_proteus 4y ago

Yes, and: natural gas is a byproduct of oil production. For decades, natural gas was flared off as an unwanted byproduct. It is still flared off today when it's uneconomical to capture it. Unlike other goods where supply will drop if there is insufficient demand, a lot of natural gas gets produced regardless due to oil production. It gets sent to market because there is no local storage capacity and the alternative would be to flare it off. Shenanigans in the futures market aside, this contributes to (temporary) oversupply driving prices negative. The same warehousing phenomena result in this negative price probably not lasting very long. Barring an extremely warm next few weeks, expect the price to be back up soon.

ShivShankaran 4y ago

another big reason is the difference in pricing between pipe and shipping. With pipe it's instant while with ship the spot pricing is before the ship start it's journey from the filling port. Added to the complexity that in EU all the ships with natural gas are stuck at ports because unloading capacity has not been upgraded. Combining both has reduced the spot prices so that more gas is not sent. It does not reflect the real demand which we are going to have in few months or the volatility. if you like volatility, natural gas is the best product. One contract is around $60k and could net you thousands in minutes if you play it right.

freefaler 4y ago

Some important caveats - the storage squeeze is only in Spain - storage facilities are pre-booked, meaning the if you want to buy some gas you should've booked the some storage beforehand. Storage supply is a non-elastic on the shore.

kgwgk 4y ago
Dutch gas spot prices for delivery within an hour going negative may be telling us something about the spare storage capacity connected to that network though.

Stranger43 4y ago

The problem is as for most of the current "Supply Chain Crisis" that the core of the problem is with logistics and distribution not raw supply, i.e. it doesn't really matter how many Liqid Gas carriers that show up of the coast of Europe as there is nowhere to unload it as the networks are designed around just in time supplies of gas flowing out of the pipelines from Russia. This distribution problem is what is sending the price of everything sky rocketing and for anything other then microchips from the overstretched TSMC fabs the real cause of the price hikes is a breakdown in the fragile "just in time" logistics network, dependent on a few choke point running at 101% efficiency all of the time.